7/7/2010
By Brian Sozzi, Research Analyst

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Yours truly is fast approaching the big 3-0.  The picture on the website I would say is still an accurate representation of what I look like, but I can't run from Father Time.  Heck, I am in the gym 10 times a week and still feel slightly sorer after playing two hours of weekend baseball compared to age 21.  Such is life, I suppose.  Rather than dive into a pool of self pity about having 28 years in the bag, I have found myself pondering the next logical step in the evolutionary process.  You guessed it, marriage. 

Like most men, I know very little about the steps needed to make that special day/night jump off.  More often than not the man is fixated on the dollars and cents, unfairly putting the burden of wedding planning to the woman.  However, counter to most men, yours truly has a healthy appetite for knowledge, planning, and general understanding which besides making me a rarity to the Y-chromosome, sets a nice groundwork for assisting a would be partner in planning every step of the way what is supposed to be the first step in the rest of a person's life.  Readers, bare with me here, I am not plugging myself for a date.  In the land of creative writing, as in romance, it's all about setting the mood.

Now, while I may ultimately never truly grasp the meaning of marriage from a woman's perspective, I do know how to seek out attractive long-term investments in the stock market (I know you like the tie in).  Sometimes the best investments are the ones hitting you right in the face.  Remember those pair of funny looking shoes in every store in the mall from an upstart company called Crocs a few years back.  Or how about a gaming machine called the NES from a some small tech company in 1985, Nintendo.  When it comes to weddings, my general analytical intuition is that they have made a strong snapback from 2009, a year in which demand, overall, remained surprisingly resilient.  As I think about it, there is one company that is leading the charge in the evolution of the wedding business.  That company, is The Knot (KNOT).

Through acquisitions, The Knot has grown to encompass every possible resource required to not only tie the knot (pun intended) but to mesh the lives of two individuals.  Think about this for a moment.  Two people get married.  One works, the other person stays at home.  Should the person that does not work cook dinner?  If so, what do they cook?  Should the one that works feel comfortable giving the non-worker full access to the bank account?  These are all natural questions many couples face, and The Knot attempts to answer them all through the development of message forums, smartphone apps, social media pages, and good ole fashioned book and online video publishing.  It's the driving of community that is an intangible asset to The Knot.  A level of trust so to speak is brought forth, leading the user to purchase merchandise from the website.  That trust and good name in the marketplace also helps the sales team bring in ad dollars.  I could almost spend pages detailing The Knot's strategies, but for the sake of losing a captive audience check out the following list.

The Knot: At a Glance

Industry-related
* The U.S. is doling out 1.7 million marriage licenses a year for first-time married people; almost 4.2 million in overall licenses.
* Total gift registry market is valued at $12 billion annually.
* New mothers in the U.S. spend $17 billion annually on their newborns (benefits The Bump website).

Company-related
* Through acquisition, market share consolidation at a local vendor level has been attained.  This creates strong word of mouth without much need for advertising investment.
* 50% of the stock price is in cash, and there is no debt.
* Has six major online properties and three brands on Facebook, with WeddingBook having 500K plus users alone, the largest among wedding operators on Facebook.
* Business is much diversified (from book publishing to online videos).
* The company has an intangible asset....trust.  People trust the company, and that is critical to generate repeat and new business.
* First mover position in growing areas (Facebook, iPod, etc.)

Negatives
* Macy's (M) rev share arrangement altered to be more unfavorable (though that will be less of an issue in February 2011).
* A fair amount of investment in tech infrastructure is occurring, with no definitive sign a reasonable payback is in the offing.

Buy, Sell, Avoid?

In keeping with the folksy nature of this piece, I will say that The Knot shares are not cheap from a valuation standpoint.  The stock trades on a P/E multiple of 68x estimated 2011 earnings, above the five-year mean P/E.  However, earnings have a high probability of strongly accelerating in 2011, 2012, and 2013 as a result of the company's apparent first mover advantage in social media/smartphones and spending on weddings that should only trend higher.  The wildcard in my investment thesis is an unknown surrounding how baby boomers decide to spend on the weddings of their 20 something year old children given obliterated 401Ks, stock accounts, and home values.  That said, the company has a robust balance sheet, a decent moat around its business model, and conducts business in an industry that will not be dying anytime soon.
In other words, investors should tie up The Knot shares.

Brian Sozzi
Wall Street Strategies